Lucky enough to get a tax refund? Here's how to use it, experts say

If you are lucky enough to be expecting a refund on your 2014 tax return, experts say it is an excellent source of funding to help pay off high winter utility bills, lingering holiday debt and unplanned or emergency expenses.

People could also make the most of a tax refund by paying down interest-bearing debt, a retirement account or just putting it in a savings account for a rainy day.

Last year, almost nine out of 10 taxpayers received a tax refund, averaging more than $3,000, according to the Internal Revenue Service. But history indicates that the majority of consumers spend their reclaimed money less than a month after receiving it.

Refund recipients should resist the temptation to spend the money on something impulsive and unnecessary, recommends Terri Stocki, a certified education director for Consumer Credit Counseling Service of Northeastern Pennsylvania.

Many taxpayers purposely withhold more tax than is actually due as a way to put money aside - a kind of forced savings approach, said Robert M. Saunders, CPA, CGMA, from the firm Cunningham and Saunders, Scranton.

He doesn't recommend it.

"By overpaying taxes throughout the year, the government is holding onto your money like a bank," Mr. Saunders said. "However, the government is not a bank and, for this reason, generally does not pay interest on money it holds during the year and eventually refunds. In our practice, we recommend that clients pay in only the estimated tax that will be due. This way, clients can hold onto more of the disposable income during the year, which in turn could be invested to generate income, help pay ongoing bills, and pay down debt."

Both Mr. Saunders and Ms. Stocki made basic recommendations to those with refunds:

- Pay down credit card debt, starting with accounts with high interest rates and high balances.

"Remember, credit card debt is another form of an unsecured loan," Ms. Stocki said. "The longer the life of the loan, the more money you'll pay to borrow the money."

Mr. Saunders said generally, interest and fees charged on credit card liabilities are not tax deductible and, for the most part, are much higher than interest on other type of debt.

For example, mortgage debt - of which the interest paid could be tax deductible if the taxpayer itemizes deductions.

"For this reason, we generally recommend that client's pay down credit card and other personal debt before applying any excess funds to other debt such as a real estate mortgage," he said.

- Make an additional payment on secured debt, such as a mortgage or automobile. Applying an extra payment to principle balances shortens the length of these loans as well. Planning to buy a home? Refunds are an ideal source for down payment funds.

- If your "rainy day" fund is experiencing a drought, boost your savings by depositing funds into an interest-bearing savings account or a money market fund, the stock market or other income-producing investment.

"These are great sources for savings that will help any taxpayer build a brighter financial future," Ms. Stocki said.

Mr. Saunders said for 2014, taxpayers can contribute up to $5,500, $6,500 for those aged 50 years or older, into a traditional IRA or Roth IRA.

"Depending on your income tax profile, you may be able to reduce your 2014 taxable income by a traditional IRA contribution," he said. "With respect to the Roth IRA, however, contributions are not tax deductible, and taxpayers may not be able to contribute to a Roth IRA if their income is too high."

With a Section 529 college savings plan for your children, grandchildren, nieces and nephews or others, you can contribute up to $14,000 in 2014 per beneficiary. Further, 529 contributions made by Pennsylvania residents are generally deductible against Pennsylvania taxable income.

- Many of Mr. Saunders' firm's clients use the refund money to help pay real estate tax bills, of which county and local municipality tax bills generally come due about the time that folks are filing their tax returns and receiving refunds, in March and April.

Contact the writer: jdino@standardspeaker.com

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